HANMI Semiconductor's (KRX:042700) Returns On Capital Not Reflecting Well On The Business

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating HANMI Semiconductor (KRX:042700), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on HANMI Semiconductor is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.09 = ₩61b ÷ (₩770b - ₩86b) (Based on the trailing twelve months to March 2024).

Therefore, HANMI Semiconductor has an ROCE of 9.0%. On its own that's a low return, but compared to the average of 5.4% generated by the Semiconductor industry, it's much better.

Check out our latest analysis for HANMI Semiconductor

Above you can see how the current ROCE for HANMI Semiconductor compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for HANMI Semiconductor .

What Does the ROCE Trend For HANMI Semiconductor Tell Us?

On the surface, the trend of ROCE at HANMI Semiconductor doesn't inspire confidence. Around five years ago the returns on capital were 22%, but since then they've fallen to 9.0%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

Our Take On HANMI Semiconductor's ROCE

We're a bit apprehensive about HANMI Semiconductor because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Yet despite these poor fundamentals, the stock has gained a huge 4,171% over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

HANMI Semiconductor does have some risks, we noticed 2 warning signs (and 1 which is concerning) we think you should know about.

While HANMI Semiconductor may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.